In the early 1980s, Michael Porter gave us Competitive Strategy and told us what fueled the engines of corporate growth. A decade later, C.K. Prahalad and Gary Hamel told us to mind our “core competencies.” In the years since, however, there hasn’t been a whole lot of shaking going on in the world of corporate strategy. As one consultant put it, “There have been several great eras in strategy. This is not one of them.”
One reason, of course, has been the seasick economy. Companies busily battening down the hatches and tossing employees over the gunwales weren’t exactly interested in charting innovative courses for growth. Another problem was guru-fication. Too many experts quit doing the hard research and instead hit the speaking circuit armed only with derivative sequels to their previous groundbreaking works, plus plenty of charm.
But there are signs of spring in the land of strategy. Quietly, minus all the hoopla, a few innovative thinkers have been doing the work of finding new strategies to succeed in a tough environment. Ram Charan has a new book out this spring; C.K. Prahalad does, too; Mercer Management Consulting’s Adrian Slywotzky and Monitor Group’s Bhaskar Chakravorti turned out books of case studies last year; and Porter is working on a new strategy tome for next year.
The true test of a strategy, of course, is whether it has any traction in the real corporate world. We wanted to know who out there on the front lines of business has been putting smart ideas into action, seeking to grow in saturated markets, hunting for talent in new places, and navigating a fully globalized environment. And so, with input from several of these thinkers, we offer these five tales of strategic innovation–not as it’s pondered or promoted, but as it’s practiced.
Create demand by solving problems
Robert Walter, Cardinal Health
Life used to be a lot simpler for companies, says Adrian Slywotzky, vice president at Mercer Management Consulting Inc. You invented some great products, bought up smaller competitors, and kept getting bigger. But now, says the coauthor of How to Grow When Markets Don’t (Warner Books, 2003), things are much tougher. “Product markets are saturated; the good acquisitions are done already.”
One way to grow in that world, Slywotzky says, is to innovate your own demand. That’s what Cardinal Health Inc., a Dublin, Ohio-based health-care-services company, is doing. Cardinal uses its unique access to both drug manufacturers and hospital chains to figure out where the problems are in the pharmaceutical business. Cardinal then creates new products to solve those problems, save customers money, and produce a tidy profit for itself. “They grow by figuring out how to improve their customers’ economics,” Slywotzky says.
Take the thorny issue of delivering medicines to patients in hospitals. Messy, handwritten prescriptions, a growing shortage of nurses and pharmacists, and pills lost during the dispensing process all add up to a dangerous and expensive problem. Incorrectly dispensed drugs can injure or kill patients and cost hospitals millions in lost medications or lawsuits.
Cardinal CEO Robert Walter smelled an opportunity. “We were already delivering products to the loading dock,” he says. “Why not manage delivery all the way to the bedside?” Walter bought a company called Pyxis, which makes ATM-style machines that are prestocked with the most commonly used medications. Approved prescriptions are loaded into the machines’ memory; nurses gain access via their fingerprints. Pyxis cuts down on mistakes and requires fewer personnel to dispense medications, improving safety and cutting costs. For Cardinal, which has deployed the machines into about 90% of U.S. hospitals, it means a steady new source of revenue plus a boost to its drug distribution business: Hospitals with Pyxis machines are more likely to buy their drugs from Cardinal.
Cardinal also found a problem it could solve for its suppliers: how to keep supply-chain costs down–a big challenge drug companies face when one of their patents expires and a once-hot product becomes a commodity. Walter’s solution? “I bought a packaging business, so we can bottle and box drugs for the big pharma companies,” he says. Drug companies can now cheaply outsource the manufacturing, packaging, and distribution of drugs to Cardinal while focusing their own efforts on developing the next blockbuster. With revenue that grew from $1.9 billion in 1993 to $51 billion in 2003 and operating earnings that ballooned from $60 million to $2.5 billion, it looks as if Walter’s strategy is sound medicine.
Customer experience is the brand
Sally Jewel, REI
Sally Jewel knows there are a thousand other places where outdoor enthusiasts can buy trail boots, maybe even at a better price. But Jewel, the CEO of outdoor-gear retailer Recreational Equipment Inc., also knows there’s simply nowhere else hikers will find the REI experience: testing boots on an indoor mountain to see how much their toes hurt when they tromp downhill, or trying them on a climbing wall to check traction. At REI’s flagship store in Seattle, hikers do just that, and at REIs across the country, shoppers also test gas stoves, practice setting up tents, and ask real explorers–who happen to be store clerks–which sleeping bags they would use on a mountain trek.
The in-store learning works both ways. When women shoppers looking to get active began flooding stores in recent years, REI responded with a new line of products based on what they asked for: tops with built-in bras for hiking and sleeping bags with extra room at the hips and extra warmth at the feet. When its staff heard complaints from shoppers about being pressed for time, REI responded with more gear for activities that can be done in a day, instead of focusing only on multiday adventures.
In a world where customer service is routinely terrible, REI has created a customer experience that is unique in retail. “We used to be product-driven–assuming we have the experience in gear and relying on customers to trust us to pick the right products,” Jewel says. “Our breakthrough four years ago was to shift to being market-driven–paying attention to who these customers are and how we can adapt to the way they want to recreate.”
If indoor mountains and climbing walls sound gimmicky, don’t be fooled. It’s not the individual pieces but the combined effect that’s important. In his most recent book, The Future of Competition (Harvard Business School Press, 2004), University of Michigan professor C.K. Prahalad writes that developing brand value by increasing the quality, not just the frequency, of interactions with customers, is a strategic imperative in a market overcrowded with too many brands for customers to care about. No longer content with the emotional imagery of advertising campaigns, shoppers now demand experiences in exchange for brand loyalty. As Prahalad puts it, “Experience is the brand.”
The REI experience extends beyond its store walls. REI’s Web site stocks thousands of products; customers can access it from kiosks in stores, and clerks can use it to place orders at checkout. The site was profitable in its second year and contributed $84 million in revenue in 2003. That successful multichannel strategy, with seamless click-and-mortar operations, is a part of REI’s success. So too is its effective vertical integration as both a manufacturer of original products and reseller of other brands, which kept overall sales growth at 9% during a tough retail year. And so is its active base of co-op members who pushed the company to nearly double its stores to 70 since 1996. But in the end, perhaps REI’s success relates back to Prahalad’s insight. Says Kate Delhagen, who follows retailing for Forrester Research: “People care about the REI experience.”
Competitors can be partners
Chet Huber, OnStar
OnStar’s president, Chet Huber, had a simple measure of success in the early days: a bulls-eye target on the wall of his office with a big “50” in the middle. Every time the company notched 50 new customers in a single day, Huber celebrated. “That was the home run we were looking for,” he says. “Now, of course, we’re doing about 1.5 million new customers in a year. We’ve had some days when we get 15,000 customers.”
It took some doing to get there. Launched in 1996, the General Motors “telematics” service monitors users’ cars and provides 24-hour emergency communications. Huber’s initial hope for OnStar was simply to create a recurring source of revenue for GM–something to ensure a continual flow of money between car purchases. But its costs were steep: OnStar needed call centers nationwide and partnerships with emergency and roadside services in order to deliver on its “safety, security, and peace of mind” promise. With relatively few customers, it was hard to see how OnStar could make money.
So Huber made the move that changed OnStar’s fate. He approached GM’s board of directors and said he wanted to install OnStar in non-GM cars, too. Within the industry, Huber’s idea sounded like sleeping with the enemy: GM was giving away a proprietary techno-logy it had spent millions to develop. “Launching a new innovative technology and service is an accomplishment in itself, but actually selling this to competitors is unheard of,” says Thilo Koslowski, vice president and lead automotive analyst at research firm GartnerG2. There were risks for those competitors, too: OnStar would collect information about their customers when it signed up drivers, and would be getting an early look at their new car models.
Huber argued that OnStar could turn competitors into partners, to the benefit of both, and keep competitive information secure. GM would realize significant economies of scale by signing up additional customers. Rivals would get a way to add customer value and enhance brand loyalty without having to take an enormous hit to their own bottom lines by developing their own systems. “Huber has created a unique partnership between the new business and the existing parent company, GM, which allows OnStar unpre-cedented autonomy to reach out to competitors and broaden its customer base,” says Adrian Slywotzky of Mercer Management Consulting Inc.
Huber’s mold-breaking strategy worked. Today, OnStar provides its service to Lexus, Audi, Isuzu, Acura, Volkswagen, and Subaru cars, in addition to GM’s own lines. OnStar now controls 70% of the market. Ford folded its competing telematics business, outsourcing it to OnStar’s distant competitor, ATX Technologies Inc. GM’s service now has 2.5 million customers, and 2003 revenues were estimated at nearly $1 billion. “We are proud of our partnerships because it obviously means we’ve delivered on what we promised,” Huber says.
Talent is wherever you find it
Andrew House, Sony
When the Sony PlayStation burst onto the scene in 1994, it almost instantly grabbed 70% of the market from two well-entrenched incumbents, Nintendo and Sega. It was, by any measure, a remarkable debut, and it stemmed from a single insight: If the best and most exciting games were being developed for Sony’s console, the gamers would surely follow. Seems obvious enough. But how to make sure those games were created for Sony? Nintendo and Sega leaned heavily on the internal development of games by staffers and on refurbished old hits. From the beginning, Sony wanted to be open to the best ideas, wherever they came from. So it used outside developers to produce most of its games, and even reached out to gamers themselves. “We didn’t want outside developers to be peripheral to our business model,” says Andrew House, an early PlayStation team member and executive vice president of Sony Computer Entertainment America. “We knew that the widest variety of content possible was the best way to build the largest consumer base possible.”
C.K. Prahalad, professor at the University of Michigan, calls the strategy a “transformation of the value-creation process.” In increasingly competitive environments, it’s not enough to seek talent in the usual channels. Especially in the gaming industry, where users know what they like to play and often have the skills to create what they want, it’s a strategic advantage to reach out to them for innovation.
Soon, the company was searching high and low for talent. In 1997, it launched a developer kit aimed at hobbyists. “We sent it to budding college developers who wanted to try their hands,” House says. Ideas from those amateurs made their way into commercial games in Japan. Meanwhile, externally developed titles like Final Fantasy, Madden NFL Football, and Grand Theft Auto helped put Sony’s second-generation console, the PlayStation 2, at the top of the heap in 2001. Sony also launched a Linux developer kit for just $199 in 2002. “It’s our way of feeding the market for the future. Some of the first great games were developed by people at home in their garages. If we’re not getting people involved and looking for opportunities very early on, we really are missing out,” says House. The payoff for all this reaching out? In 2003, PS2 titles generated $80 million in revenue and included 9 of the top-10 U.S. games in December–all but one of them developed by outsiders.
It’s not always the customer
Rudy Schlais, General Motors China
China is the pot of gold for companies with global aspirations. Its billion-customer market and seemingly endless supply of cheap labor beckon seductively, yet the market seems always out of reach. Many have failed by trying to entice Chinese customers with brands to which they cannot relate, or with products they simply do not want. As a result, most foreign companies have turned simply to exploiting the cheap sourcing possibilities, exporting their finished goods right back to the West.
The Boston Consulting Group senior vice president George Stalk says that’s a huge mistake. “If companies don’t take advantage of developing the emerging local market, people will take the training and technology and simply become their biggest competitors,” he says. “They’ll be cannibalized by local versions of their very own products.”
Stalk’s Shanghai-based partner Jim Hemerling identifies General Motors as one company to avoid this trap by establishing its Buick cars as a coveted premium brand in China, then quickly moving to introduce successful mid-range and entry-level vehicles. Though GM currently controls just 10% of the Chinese market, ranking second among foreign automakers behind Volkswagen (with 30%), it has gotten there in just five years, while VW has played in the Chinese market for two decades.
How did GM succeed where so many others failed? “They have been recognized as a company with shrewd government relations right from the initial negotiations to choose GM over Ford for the first joint venture plant in Shanghai,” Hemerling says. Rudy Schlais, the man tapped to lead GM into the Chinese market in 1994, recognized that it was not nearly as important to court the end customer as it was to seek the aid of the Chinese government.
So when presented with the opportunity to meet with a Chinese vice premier in 1994, Schlais leaped at the chance. “I sat down with him and asked, ‘GM is late coming to China, what do we have to do to really win?’ ” Schlais recalls. The official said it was vital to create employment for locals and to help China develop a world-class automotive industry (instead of using the local market as a dumping ground for outdated vehicles and technologies). That insight helped GM win the competition with Ford and Toyota for the coveted right to create a joint venture.
To establish Buick’s premium brand image, Shanghai GM again courted the government, selling 35% of its early output as official vehicles. GM’s good governmental ties haven’t insulated it from all woes in China, including the piracy of one of its Chevrolet models this year. But in 2003, GM China sold nearly 387,000 cars, an astonishing 46% rise over its sales in 2002.